Yang Sun

Abstract We study how involving employee board representatives in determining managerial compensation affects the within-firm pay ratio. The 2009 German Compensation Act shifted executive pay decisions to the entire supervisory board, amplifying employees’ influence at firms with parity employee representation. This reform resulted in increased manager-to-worker pay ratios, driven by higher managerial compensation, without corresponding changes in firm performance or manager turnover. The result is robust in matched samples and absent in falsification tests. Improved employee job security and weak wage increases point to a possible alliance between employees and managers, indicating shared governance may not necessarily reduce pay inequality.

Abstract Target date funds (TDFs) provide retirement investors, many of whom are unsophisticated or inattentive, with age-appropriate exposures to different asset classes like stocks and bonds. To maintain exposures, TDFs trade actively against market returns, buying stock funds when the stock market does poorly, and selling when the market does well (Parker et al ., 2023, Journal of Finance ). This paper shows that trading by TDFs was a significant stabilizing force in US equity markets during the unprecedented economic volatility of the COVID-19 pandemic period. Specifically, TDFs – now comprising a quarter of all 401(k) plan assets – caused significant contrarian investment flows across asset classes, flows that were not undone by enrollment of TDF investors or by discretionary actions by TDF managers. Mutual funds with large ownership by TDFs had more stable funding through the pandemic, and stocks that had greater indirect ownership by TDFs had lower co-movement with the market and lower volatility during the pandemic period.

We examine the selection of fund self-declared benchmarks. While the incidence of style mismatched benchmarks is high at the beginning of our sample (41% of fund assets/34% of funds), it declines significantly over time. This decline is driven primarily by existing funds changing their self-declared benchmarks to correctly match their style. In examining why funds ‘correct’ their benchmarks over time, we find that investor learning, institutional investor governance, product market competition and fund company risk management all play a role. Lastly, we find that funds overseen by entrenched managers are more likely to use a mismatched benchmark

Abstract We examine the role of factor models and simple performance heuristics in investor decision-making using Morningstar’s 2002 rating methodology change. Before the change, flows strongly correlated with CAPM alphas. After, when funds are ranked by size and book-to-market groups, flows become more sensitive to 3-factor alphas (FF3). Flows to a matched institutional sample (same managers/strategies) follow FF3 before and after the change but are unrelated to the CAPM. Placebo tests with sector funds and other factor loadings show no effects. Our results imply that improvements in simple performance heuristics can result in more sophisticated risk adjustment by retail investors.

The active money management industry is characterized by both strong competitive pressure from passive investment vehicles and high fees. This paper investigates how the introduction of low-cost index funds affects fund company strategies. The retail mutual fund market is segmented, where unsophisticated investors rely on financial advisers and sophisticated ones invest directly. Exploiting the staggered entry of low-cost Vanguard index funds as competitive shocks, I show that, in response to competition, incumbents sold to self-directed investors reduce their fees by 5% of the mean; however, funds sold with broker recommendations increase their fees by 6% of the mean. Index fund entry also slows the growth of actively managed funds. The responsiveness of broker-sold fund flows to distribution fees increases, suggesting a shift in composition toward less elastic consumers. Further, incumbents increase the degree of active management. The results illustrate why mutual fund fees slowly decline in the aggregate despite competition from lower-cost alternatives. This paper was accepted by Gustavo Manso, finance.